Treasury bailout program likely to shift course

What will Social Security benefits look like in 30 years and beyond? Will they survive the baby boomers?
— Scott, Mishawaka, Ind.

The scramble to pass a stimulus package has moved to the top of Congress and President-elect Obama’s agenda, but the overhaul of Social Security and Medicare are still big priorities. In fact, the huge expansion of the national debt may bring the debate about Social Security back into focus.

The Bush administration’s proposed solution to the government’s growing liability for retirement benefits was to ease the government out of the business of providing income for retirees.

The move to partly privatize the program ran into opposition for a variety of reasons — including concerns that individuals might not be able to manage and protect their retirement savings. The collapse of 401(k) accounts in the latest market meltdown seems to validate those concerns.

There was also much debate about just how financially strapped the Social Security program really is. My opinion is that — barring another Depression — concerns about the fund’s solvency, while legitimate, have been overblown. (Full disclosure: I'm a boomer. So maybe this is wishful thinking on my part.)

For starters, forecasting the solvency of the fund becomes more difficult to do the further out you go. The Social Security trustees report acknowledges this by offering up a best-, worst- and middle-case scenario, depending on a variety of assumptions (including future rates of fertility, mortality, unemployment and wage differentials). 

In the best case, the program is fully funded, with assets reaching more than six times annual costs by 2080 and rising from there. See page 14 (.pdf) of the full report. Even with the middle case, the fund doesn’t run out of reserves until 2041.  (That’s not true for the Medicare program, which is expected to run out of money a lot sooner — possibly within a decade — in part because medical costs are rising much faster than the costs of paying Social Security benefits.)

There are several steps that could be taken between now and 2041 to extend the solvency of the Social Security program indefinitely. One would be to raise the cap on earnings subject to Social Security taxes; today, earnings over roughly $90,000 don’t get taxed.

Another would be to switch the formula for benefit increases by indexing them to the cost of living instead of the average rise in wages. You could also gradually increase the retirement age — to reflect the gradual increase in longevity that has raised the cost of paying for retirement. Or some combination of all three options.

True, all of these changes involve raising taxes or cutting benefits. But making relatively small adjustments now to balance the books will be a lot less painful than waiting until the problem gets even worse.

Another criticism of the Social Security fund is that “the money isn’t there” to pay claims because the surplus has been invested in Treasury debt — which is, after all, just another IOU. But the $3 trillion saved up to pay future claims had to be invested somewhere — if not Treasuries, then bank CDs or debt securities issued by large companies or other governments. The fact that these securities ended up back on the plus side of the ledger elsewhere in the government's accounting is more or less irrelevant. Imagine if it had been invested in bonds issued by GM.

It’s true that the ballooning national debt and massive government deficits are worrisome. But if the Treasury were to default on any of its debt, we would have a lot more to worry about than retiree benefits.

Will the recent implosion of retirement accounts have an unintended, though beneficial, side effect? If a substantial number of baby boomers delay retirement by several years, will this delay the impending collapse of Social Security?
— Rex, Houston, Tex.

Boomers already have a choice of deferring retirement until 70 in exchange for getting a bigger monthly check when they finally collect. It’s true that many boomers will probably have to keep working longer than they expected.

But that could cut both ways. Higher-income boomers may hold off collecting because they’ll lose a big chunk of benefits to taxes. (For joint filers with combined income of more than $44,000, up to 85 percent of benefits are subject to income tax.)

On the other hand, the loss of retirement savings may force many boomers to start collecting sooner — because they’ll have little else to fall back on. That could wind up putting a bigger burden on the system.

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